• TSX -74.54 Weakness in resources, energy and financials stocks pulled the Canadian market into the red
• DOW -18.97 as investors weighed earnings news, President Obama's health care proposal and Schlumberger's $11-billion U.S. buyout deal for oil services rival Smith International. Stocks ended higher last week as investors digested the Federal Reserve's decision to lift the emergency bank lending rate
• Dollar -.20c to 95.91cUS
• Oil +$.25 to $80.16US per barrel.
Consumer debt could be drag on banks
John Greenwood, Financial Post
Last year Canadian banks emerged as global heroes after they made it through the financial crisis almost unscathed.
But if the financial meltdown was the defining challenge for 2009, analysts worry that ballooning debt levels may end up being the comparable trial for 2010 as consumers struggle to meet their obligations amid an uncertain economy and rising interest rates.
We'll find out what the big banks think as Canadian Imperial Bank of Commerce and National Bank of Canada kick off the bank earnings season on Thursday.
According to a recent report by Moody's Canada, Canadian household debt climbed to a record 145% of income, from around 95% 20 years ago, and could exceed U.S. levels in the next three years.
Meanwhile, a task force on financial literacy sponsored by the federal government found that more than a third of Canadians are struggling to keep track of their finances and make responsible decisions.
Analysts are watching closely because most of that debt, including nearly $446-billion of mortgages and $336-billion of credit cards and other loans, is held by the banks.
The good news for investors is that the riskiest mortgage debt is insured through the Canada Mortgage and Housing Corp.
Mario Mendonca, an analyst at Genuity Capital Markets, said he's not "overly concerned" by the high level of consumer debt, pointing out that Canadians tend to be conservative with their finances and try to meet their obligations even if they get into trouble.
With most economists predicting healthier economic growth in 2010 and 2011, unemployment should not prove a major headwind meaning that the banks' consumer loans are safe despite the high level of indebtedness, according to Mr. Mendonca.
He's calling for a provisions for credit losses to start to decline noticeably in the second half of the year as revenue from underwriting and advisory services pick up amid a strengthening economy.
"We view the next few quarters as a transition period," he said in a research note last week,
Barclays Capital analyst John Aiken is also optimistic on the debt front, pointing out in a recent note that "all signs point to improving credit quality and lower provisions."
Given recent positive signs in credit markets in Canada and the United States, Mr. Aiken said "it is quite possible" that the domestic banks will set aside less than they did last quarter to cover delinquencies.
Mr. Aiken's main area of concern is revenues from trading operations. A source of eye-popping profits last year as banks took advantage of wider spreads and the dislocation in credit markets, trading revenue at all the banks is expected to shrink in 2010 as financial markets continue to normalize.
"We believe that a significant decline in trading revenues could be the story of the quarter and reset earnings levels for 2010," he said in a note to clients.
Still, much depends on the economy which remains fragile as Ottawa looks for ways to withdraw supports put in place in the wake of the financial crisis.
"There is a fair degree of uncertainty," said Lindsay Gordon, chief executive of HSBC Bank Canada, who pointed out that while the Canadian economy appears in good shape relative to other countries, the world is increasingly connected and it was less than a year ago that storm gripping financial markets created almost "a sense of Armageddon."
"All governments including the Canadian government are in a challenging situation," he said in an interview.
Though a small player in this country HSBC has significant exposure to residential mortgages in Vancouver and other urban markets.
"There is no question that over the last year there has been an increase in delinquencies in residential mortgages at all the banks," he said, adding that the increase at HSBC has been slight.
Read more: http://www.financialpost.com/news-sectors/story.html?id=2598833#ixzz0gJZR7Wun
Tuesday, February 23, 2010
Monday, February 22, 2010
Financial Update For Feb. 22, 2010
China's building bubble about to burst While you may think of China as just a country on the other side of the world, it could have enormous impact on our economy. Experts fear if air goes out of Beijing market, the world economic recovery may go flat.
“the overheated Chinese housing market is "Dubai times 1,000 — or worse."
“Luxury apartments, are priced at about 80 times the average income of the city's residents”. What do you suppose the tds is on those?
• TSX +14.45
• DOW +9.45
• Dollar +.09c to 96.11cUS
• Oil +$.75 to $79.81US per barrel.
• Gold +$3.30 to $1,121.30 USD per ounce
Women earn the freedom to opt out
Karen Mazurkewich, Financial Post
This year, American women will pass a major milestone: They will surpass men in the workplace. Canadian women passed the 50% threshold last year. The gender revolution has quietly overtaken us.
It has been 47 years since pioneering feminist Betty Friedan penned The Feminine Mystique, launching women on the road to economic empowerment. All these years later, memories of the injustices faced by grandmothers and mothers are fading. Sexism may have once been the norm but is now considered passé. Today, it takes a retro show like Mad Men, set in the 1960s, to remind us how far women have come in the workplace.
But here's the rub. Women have overtaken men in the workplace, but they still don't make as much money, and have barely made a dent in the executive ranks and boardroom.
Part of the reason is that women make up 70% of part-time workers in this country - so are paid less. But Rosenzweig & Company's fifth annual ranking of women in top jobs at Canada's largest public companies shows the numbers have slipped to 6.9% in 2009 from 7.2% in 2008.
"The number of women at the top is low because social arrangements haven't kept up with these changes," says Jay Rosenzweig, founding partner of the consulting firm. He's referring to day care and other social nets that particularly affect women.
But there is some good news: Women may be better suited than men to have and hold jobs in the future.
First, more women than men graduate from university, making the female workforce more educated. Now, a study from Harvard University suggests that in a world where job uncertainty is increasing, women can better adapt to career change.
Boris Groysberg, associate professor in the Organizational Behavior unit at the Harvard Business School, has studied star performers in the financial field. He discovered a significant gender difference: Female stars do not suffer when they jump jobs, but men do. Top male analysts who switched employers became average; women continued to be top performers.
Mr. Groysberg said the reason has to do with a predominately male corporate culture. Men build relationships with men in the company, he says. Successful women combat the institutional barriers inside their firms by building networks outside. It is those outside relationships, he says, that make women more portable.
The message to companies: "You should be hiring women [because] women may bring a lot more of their performance [to your company] than men," says Mr. Groysberg.
What's more: Women tend to do more due diligence when seeking new jobs. Whereas a man will maximize around career opportunity and salary, a woman will maximize around a job that allows her to be around her family, her values and meaningful work, says Beatrix Dart, executive director, Initiative for Women in Business at University of Toronto's Rotman School of Management.
Put simply: Women are more thoughtful at choosing their next employer. But there is a caveat. While women in knowledge-based jobs may be better suited for making lateral career moves, their strategy of developing outside networks will not help them climb the corporate ranks, says Mr. Groysberg. Women will continue to struggle for those top jobs in the corporate sector.
The answer for many is to opt out and take the entrepreneurial route.
Alison Snowball was on the corporate career path until her job on the institutional equities desk at TD Securities was restructured last year. She had prepared for this job for years. Not only did she graduate with a business of commerce degree from Dalhousie University, she had worked her way through school working at various financial institutions. Four years into a job at TD Securities, Ms. Snowball knew something wasn't quite clicking.
"From a generational perspective, the people still in power are 25 years older than myself and have a different mentality. It's like a locker room. That's just the reality," says Ms. Snowball.
So, rather than scramble for another position in the banking sector after she was laid off, Ms. Snowball decided to switch career paths. She has opened her own Toronto art gallery.
Ms. Dart of Rotman is seeing more women starting their own business because they can't maximize opportunities in a company setting. The most successful are those who have been strategic. "Women who leave careers to raise their kids during those critical years aren't as successful as those who seek jobs with more flexibility during those critical years," she says.
While the trend to start a small business is often painted as "opting out," Barbara Orser, of the University of Ottawa Telfer School of Management, argues that Canadian women "are some of the most entrepreneurial in the world." She says women are increasingly looking to export, thinking about enterprise growth and are becoming a bigger part of the Canadian economy as a result.
Read more: http://www.financialpost.com/news-sectors/story.html?id=2588533#ixzz0gCnFSPd5
China's building bubble about to burst
By David Olive Business Columnist Toronto Star
Frenzied developers with access to cheap money are creating a glut of premium office space and luxury apartments, priced at about 80 times the average income of the city's residents. Prospective middle-class homeowners, in panic-buying mode, are snapping up two properties at once, hoping to flip the second one to finance the first. Civic officials are encouraging the building boom.
The sale of vacant lots bolster their municipal coffers.
Banks eager to reap upfront fees are granting mortgages to all comers. Even factory owners are in on the speculation, generating more profit from flipping property than from traditional manufacturing, which increasingly is moving offshore to Vietnam, Malaysia and other nations with lower labour costs.
No, this isn't Toronto in the late 1980s, or Santa Barbara or Tallahassee six years ago at the height of America’s record housing boom, which culminated in a global credit crisis and ensuing recession.
This is Beijing today, where until recently one of the most popular programs on local television was a reality show called The Romance of Housing that spotlighted the struggles of families pursuing elusive affordable shelter.
And where the papers are reporting on suicides and violent protests after developers in cahoots with local officials seize someone's land for a new office building or apartment block.
The disturbing phenomenon extends beyond Beijing, where housing prices are far higher than in Dubai's overbuilt property market before that red-hot Persian Gulf economy imploded last year. In December alone, Chinese housing prices rose almost 8 per cent in 70 major Chinese cities, while housing starts leapt by 34 per cent nationwide.
Jim Chanos, the legendary U.S. short-seller who thrives on post-bubble bargain-hunting, claims the overheated Chinese housing market is "Dubai times 1,000 — or worse."
Chanos has an obvious stake in chaos. Not so Patrick Chovanec, as associate professor at the business school at Beijing's Tsinghua University. Chovanec cites the intoxicating impact of Beijing's $586-billion (U.S.) stimulus package and an additional $1.4 trillion in lending by state-controlled banks to real estate and other industries last year alone.
With easy money in such abundance, it's no wonder developers are on a building jag.
"You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land in Beijing — not even desirable plots of land — to astronomical rates," Chovanec told Bloomberg News last week.
"At the same time, you have 30 per cent-plus vacancy rates and slumping rents in commercial property. So it's just a case of when (lenders] recognize the losses — or don't."
For the moment, there are two Chinese property markets. There's an over-served premium-priced office and luxury apartment sector, and a neglected affordable housing market so underserved for lack of profit margins that Beijing recently pledged on its own to build 15 million units of shelter for low-income people.
Limited though the boom is to the high end of the market, the stupendous sums tied up in it have the potential to impede, if not halt, China's fast-track Industrial Revolution when the boom inevitably ends.
"It's simply a matter of time before the Chinese real estate bubble bursts," insists Yi Xianrong, longtime student of Chinese property trends at the finance department of the Chinese Academy of Social Sciences. "A bubble burst in China would not only deal a fatal blow to our own economy, but would also extinguish the world's hope for recovery."
Indeed, Western economies are counting heavily on China to lead the nascent global recovery. China's projected GDP growth this year of about 9.5 per cent will account for about one-third of global economic growth this year.
China has been providing one of the bright spots in the recent global downturn.
Bankruptcy victim General Motors has lost money in North America and Europe for years, but it profits from booming Chinese sales.
And Paul Otelli, CEO of California-based Intel Corp., the world's leading computer-chip maker, recently said, "Thank God for China. It buoyed our company through the depths" of the recent global downturn.
China has just overtaken Germany as the world's largest export economy, and eclipsed the U.S. as the biggest vehicle market.
Wen Jiaboa, the Chinese premier, has acknowledged that "property values have risen too quickly," and vowed a crackdown on speculators. China's central bank has twice this month raised the amount of capital Chinese banks must hold in reserve to cover losses, reducing funds available for property loans. But government officials are in a quandary over how hard to apply the brakes. A sudden about-face in Beijing's easy-money policy of ultralow interest rates could trigger widespread property devaluations that would hit not only homeowners but also construction, finance, steel, furniture and other sectors tied to the real estate market.
Yet the longer the bubble persists, the more punishing the inevitable implosion, as Western economies learned from the collapse of the U.S. housing market in 2007-08.
So, uncertainty rules.
A soft landing can be engineered if China's recent, modest steps to cool the market send a powerful enough signal to developers and panic buyers — and provide enough time for a rise in average income levels to match exorbitant housing prices.
In the meantime, there are a few signs the mania is exhausting itself. The new "instant city" of skyscrapers and thousands of villas built in the coal city of Ordos in China's Inner Mongolia is largely vacant — a sobering sign to overzealous developers.
"Who would go there?" a downtown resident told Bloomberg Business Week recently of the sprawling metropolis taking shape in the nearby suburban desert. "It's a city of empty buildings."
The Romance of Housing show was yanked from the air in November, ostensibly because state officials were offended by a scene depicting a corrupt state official. But the show more likely got the hook over concerns that it celebrated recklessness with personal finances. And in Beijing, dirt is accumulating around the entrances to the newly built twin-tower head office complex of the Bank of Communications Co.
In a business district with a 35 per cent vacancy rate due to over-exuberant developer activity, the lobby of the BCC landmark is now used as a bicycle parking lot.
http://www.thestar.com/business/article/769105--olive-china-s-building-bubble-about-to-burst
“the overheated Chinese housing market is "Dubai times 1,000 — or worse."
“Luxury apartments, are priced at about 80 times the average income of the city's residents”. What do you suppose the tds is on those?
• TSX +14.45
• DOW +9.45
• Dollar +.09c to 96.11cUS
• Oil +$.75 to $79.81US per barrel.
• Gold +$3.30 to $1,121.30 USD per ounce
Women earn the freedom to opt out
Karen Mazurkewich, Financial Post
This year, American women will pass a major milestone: They will surpass men in the workplace. Canadian women passed the 50% threshold last year. The gender revolution has quietly overtaken us.
It has been 47 years since pioneering feminist Betty Friedan penned The Feminine Mystique, launching women on the road to economic empowerment. All these years later, memories of the injustices faced by grandmothers and mothers are fading. Sexism may have once been the norm but is now considered passé. Today, it takes a retro show like Mad Men, set in the 1960s, to remind us how far women have come in the workplace.
But here's the rub. Women have overtaken men in the workplace, but they still don't make as much money, and have barely made a dent in the executive ranks and boardroom.
Part of the reason is that women make up 70% of part-time workers in this country - so are paid less. But Rosenzweig & Company's fifth annual ranking of women in top jobs at Canada's largest public companies shows the numbers have slipped to 6.9% in 2009 from 7.2% in 2008.
"The number of women at the top is low because social arrangements haven't kept up with these changes," says Jay Rosenzweig, founding partner of the consulting firm. He's referring to day care and other social nets that particularly affect women.
But there is some good news: Women may be better suited than men to have and hold jobs in the future.
First, more women than men graduate from university, making the female workforce more educated. Now, a study from Harvard University suggests that in a world where job uncertainty is increasing, women can better adapt to career change.
Boris Groysberg, associate professor in the Organizational Behavior unit at the Harvard Business School, has studied star performers in the financial field. He discovered a significant gender difference: Female stars do not suffer when they jump jobs, but men do. Top male analysts who switched employers became average; women continued to be top performers.
Mr. Groysberg said the reason has to do with a predominately male corporate culture. Men build relationships with men in the company, he says. Successful women combat the institutional barriers inside their firms by building networks outside. It is those outside relationships, he says, that make women more portable.
The message to companies: "You should be hiring women [because] women may bring a lot more of their performance [to your company] than men," says Mr. Groysberg.
What's more: Women tend to do more due diligence when seeking new jobs. Whereas a man will maximize around career opportunity and salary, a woman will maximize around a job that allows her to be around her family, her values and meaningful work, says Beatrix Dart, executive director, Initiative for Women in Business at University of Toronto's Rotman School of Management.
Put simply: Women are more thoughtful at choosing their next employer. But there is a caveat. While women in knowledge-based jobs may be better suited for making lateral career moves, their strategy of developing outside networks will not help them climb the corporate ranks, says Mr. Groysberg. Women will continue to struggle for those top jobs in the corporate sector.
The answer for many is to opt out and take the entrepreneurial route.
Alison Snowball was on the corporate career path until her job on the institutional equities desk at TD Securities was restructured last year. She had prepared for this job for years. Not only did she graduate with a business of commerce degree from Dalhousie University, she had worked her way through school working at various financial institutions. Four years into a job at TD Securities, Ms. Snowball knew something wasn't quite clicking.
"From a generational perspective, the people still in power are 25 years older than myself and have a different mentality. It's like a locker room. That's just the reality," says Ms. Snowball.
So, rather than scramble for another position in the banking sector after she was laid off, Ms. Snowball decided to switch career paths. She has opened her own Toronto art gallery.
Ms. Dart of Rotman is seeing more women starting their own business because they can't maximize opportunities in a company setting. The most successful are those who have been strategic. "Women who leave careers to raise their kids during those critical years aren't as successful as those who seek jobs with more flexibility during those critical years," she says.
While the trend to start a small business is often painted as "opting out," Barbara Orser, of the University of Ottawa Telfer School of Management, argues that Canadian women "are some of the most entrepreneurial in the world." She says women are increasingly looking to export, thinking about enterprise growth and are becoming a bigger part of the Canadian economy as a result.
Read more: http://www.financialpost.com/news-sectors/story.html?id=2588533#ixzz0gCnFSPd5
China's building bubble about to burst
By David Olive Business Columnist Toronto Star
Frenzied developers with access to cheap money are creating a glut of premium office space and luxury apartments, priced at about 80 times the average income of the city's residents. Prospective middle-class homeowners, in panic-buying mode, are snapping up two properties at once, hoping to flip the second one to finance the first. Civic officials are encouraging the building boom.
The sale of vacant lots bolster their municipal coffers.
Banks eager to reap upfront fees are granting mortgages to all comers. Even factory owners are in on the speculation, generating more profit from flipping property than from traditional manufacturing, which increasingly is moving offshore to Vietnam, Malaysia and other nations with lower labour costs.
No, this isn't Toronto in the late 1980s, or Santa Barbara or Tallahassee six years ago at the height of America’s record housing boom, which culminated in a global credit crisis and ensuing recession.
This is Beijing today, where until recently one of the most popular programs on local television was a reality show called The Romance of Housing that spotlighted the struggles of families pursuing elusive affordable shelter.
And where the papers are reporting on suicides and violent protests after developers in cahoots with local officials seize someone's land for a new office building or apartment block.
The disturbing phenomenon extends beyond Beijing, where housing prices are far higher than in Dubai's overbuilt property market before that red-hot Persian Gulf economy imploded last year. In December alone, Chinese housing prices rose almost 8 per cent in 70 major Chinese cities, while housing starts leapt by 34 per cent nationwide.
Jim Chanos, the legendary U.S. short-seller who thrives on post-bubble bargain-hunting, claims the overheated Chinese housing market is "Dubai times 1,000 — or worse."
Chanos has an obvious stake in chaos. Not so Patrick Chovanec, as associate professor at the business school at Beijing's Tsinghua University. Chovanec cites the intoxicating impact of Beijing's $586-billion (U.S.) stimulus package and an additional $1.4 trillion in lending by state-controlled banks to real estate and other industries last year alone.
With easy money in such abundance, it's no wonder developers are on a building jag.
"You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land in Beijing — not even desirable plots of land — to astronomical rates," Chovanec told Bloomberg News last week.
"At the same time, you have 30 per cent-plus vacancy rates and slumping rents in commercial property. So it's just a case of when (lenders] recognize the losses — or don't."
For the moment, there are two Chinese property markets. There's an over-served premium-priced office and luxury apartment sector, and a neglected affordable housing market so underserved for lack of profit margins that Beijing recently pledged on its own to build 15 million units of shelter for low-income people.
Limited though the boom is to the high end of the market, the stupendous sums tied up in it have the potential to impede, if not halt, China's fast-track Industrial Revolution when the boom inevitably ends.
"It's simply a matter of time before the Chinese real estate bubble bursts," insists Yi Xianrong, longtime student of Chinese property trends at the finance department of the Chinese Academy of Social Sciences. "A bubble burst in China would not only deal a fatal blow to our own economy, but would also extinguish the world's hope for recovery."
Indeed, Western economies are counting heavily on China to lead the nascent global recovery. China's projected GDP growth this year of about 9.5 per cent will account for about one-third of global economic growth this year.
China has been providing one of the bright spots in the recent global downturn.
Bankruptcy victim General Motors has lost money in North America and Europe for years, but it profits from booming Chinese sales.
And Paul Otelli, CEO of California-based Intel Corp., the world's leading computer-chip maker, recently said, "Thank God for China. It buoyed our company through the depths" of the recent global downturn.
China has just overtaken Germany as the world's largest export economy, and eclipsed the U.S. as the biggest vehicle market.
Wen Jiaboa, the Chinese premier, has acknowledged that "property values have risen too quickly," and vowed a crackdown on speculators. China's central bank has twice this month raised the amount of capital Chinese banks must hold in reserve to cover losses, reducing funds available for property loans. But government officials are in a quandary over how hard to apply the brakes. A sudden about-face in Beijing's easy-money policy of ultralow interest rates could trigger widespread property devaluations that would hit not only homeowners but also construction, finance, steel, furniture and other sectors tied to the real estate market.
Yet the longer the bubble persists, the more punishing the inevitable implosion, as Western economies learned from the collapse of the U.S. housing market in 2007-08.
So, uncertainty rules.
A soft landing can be engineered if China's recent, modest steps to cool the market send a powerful enough signal to developers and panic buyers — and provide enough time for a rise in average income levels to match exorbitant housing prices.
In the meantime, there are a few signs the mania is exhausting itself. The new "instant city" of skyscrapers and thousands of villas built in the coal city of Ordos in China's Inner Mongolia is largely vacant — a sobering sign to overzealous developers.
"Who would go there?" a downtown resident told Bloomberg Business Week recently of the sprawling metropolis taking shape in the nearby suburban desert. "It's a city of empty buildings."
The Romance of Housing show was yanked from the air in November, ostensibly because state officials were offended by a scene depicting a corrupt state official. But the show more likely got the hook over concerns that it celebrated recklessness with personal finances. And in Beijing, dirt is accumulating around the entrances to the newly built twin-tower head office complex of the Bank of Communications Co.
In a business district with a 35 per cent vacancy rate due to over-exuberant developer activity, the lobby of the BCC landmark is now used as a bicycle parking lot.
http://www.thestar.com/business/article/769105--olive-china-s-building-bubble-about-to-burst
Friday, February 19, 2010
Financial Update For Feb. 19, 2010
• TSX +59.35 finished higher for a seventh straight session, led by gold mining shares,
• DOW +83.66
• Dollar +.34c to 96.02cUS
• Oil +$1.73 to $79.06US per barrel.
•
Canada to oppose global bank tax
Paul Vieira, Financial Post
OTTAWA -- Canada will officially oppose international efforts to get the world's major economies to impose a global bank tax, government sources tell the Financial Post.
This could potentially ignite a major divide among Group of 20 leaders at their summit meeting in Toronto this summer, and further thwart efforts to implement uniform financial regulations in the post-recession era.
Senior Canadian officials are in the midst of crafting a public response to be released shortly, say sources with knowledge of the plan. An official response is required, they say, due to recent public musings from Gordon Brown, the British Prime Minister, that the G20 countries were close to a deal on a financial services tax -- the so-called "Tobin" tax.
Canada is co-head of the group this year with South Korea.
"Canada is going to oppose any tax on financial transactions," said one source, adding the tax runs counter to the Conservative government's reputation for lower taxes.
Prime Minister Stephen Harper, as well as Finance Minister Jim Flaherty, want to use their influence as host of the next G20 meeting, in Toronto in June, to kill the proposal. The sources suggested the G20 would not agree to measures or policies unless all leaders sign on.
When he was at the World Economic Forum in Davos last month, Mr. Harper used the global stage to denounce "excessive" and "arbitrary" proposals from countries, such as Britain and France, to regulate the financial-services industry in the aftermath of the global financial crisis.
Among the proposals Mr. Harper was referring to is a levy on financial transactions, designed to make banks pay for the bailouts governments posted in 2008 and 2009 to deal with the financial crisis and to dissuade banks from making risky bets in the future.
Individually, U.S. President Barack Obama has proposed a levy on banks with assets of higher than US$50-billion, while Mr. Brown has taxed bonuses earned by London's top bankers.
Last week, Mr. Brown told the Financial Times he envisaged a G20 deal on a bank tax at the Toronto summit.
Mr. Brown said he believed backing for a global bank tax had gained momentum after Mr. Obama introduced a similar levy.
"People are now prepared to consider the best mechanism by which a levy could be raised," Mr. Brown said in the interview. "I'm interested in the way support is building up for international action."
Mr. Brown's comments have clearly irked Canadian officials. It was only a few weeks ago that Mr. Flaherty and other Group of Seven finance and central officials met in Iqaluit, and appeared to be united in finding a common front of global financial reform. As a show of unity, they agreed to commission a study on the usefulness of a bank levy.
Mr. Brown proposed a global transaction tax at a G20 meeting he hosted in Scotland last November, only to draw stiff opposition -- from, among others, Timothy Geithner, the U.S. Treasury secretary.
Canada's plan to officially quash talk of a bank-tax deal is the latest hiccup in efforts by global leaders to map out a uniform regulatory scheme in the post-crisis world. Leaders from the G20 had agreed to implement uniform rules to prevent companies from seeking out countries with less-stringent regulation. Working groups, such as the Financial Stability Board, are in the midst of developing rules that would apply, such as the levels of capital banks would need to keep on their balance sheets.
But now, despite Mr. Brown's musings, countries appear to be as divided as ever. http://www.financialpost.com/news-sectors/economy/story.html?id=2583353
Fed seeks to calm markets after discount rate rise
Emily Kaiser and Mark Felsenthal, Reuters
WASHINGTON/MEMPHIS, Tennessee -- Federal Reserve officials moved to calm speculation that a surprise rise in its emergency lending rate could bring forward broader policy tightening, saying borrowing costs in the economy would stay low.
Fed Chairman Ben Bernanke flagged the move last week, saying the central bank aimed to widen the spread between its main policy rate that remains pegged near zero and the discount rate at which banks can borrow from the Fed.
However, no one in markets expected it to act so soon and the timing of the move -- well ahead of the March 16 policy meeting -- prompted investors to price in a greater likelihood of a rise in the benchmark fed funds rate late this year.
The dollar jumped and government bonds and bank stocks fell after the Fed raised the discount rate by 25 basis points to 0.75 percent even as it cast it as a response to improved financial market conditions and not a change in monetary policy.
"This is a significant and likely symbolic move that will impact on market sentiment," Robert Rennie, a strategist at Westpac in Sydney said in The Dealing Room, a Reuters Messaging chat room.
"The emergency easing cycle began with discount rate cuts - it was all about easing liquidity to banks. So the move to raise the discount rate means the long journey toward normalization has begun."
Thursday's move is the first increase in any of the Fed's lending rates since the financial crisis blew up in 2007 and the first rate change since December 2008.
"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said in a statement.
OVERBLOWN EXPECTATIONS
While investors initially brushed aside the Fed's assurances that no tightening for the broad economy was on the cards, warnings from a senior Fed official that markets have gone too far in their tightening bets finally did sink in.
St. Louis Federal Reserve Bank President James Bullard said investors belief in high probability of a rise in the Fed's benchmark rate this year was "overblown" and that the discount rate rise should not be seen as a policy signal.
"The discount rate move is part of a normalization process which is akin to our discontinuing many of our liquidity programs," Bullard, who votes on the Fed's interest rate-setting panel this year, told reporters in Memphis. "It does not indicate anything one way or the other about what we might eventually do with the federal funds rate," he added.
The dollar pared gains and treasury futures trimmed losses, after Bullard's comments and reminders from fellow Fed officials that cheap credit was still the order of the day.
"Monetary policy -- as evidenced by the fed funds rate target -- remains accommodative," Dennis Lockhart, Atlanta Fed president, said in a speech. "This stance is necessary to support a recovery that is in an early stage and, in my view, still fragile."
Still, share markets in Asia were on the defensive as the Fed's action, which follows China's moves to curb lending, served as a reminder that the period of cheap cash that fueled last year's stock market rally may be slowly drawing to an end.
RETURN TO NORMAL
Before the financial crisis, the discount rate was typically a full percentage point above the federal funds rate. Thursday's decision begins to move it back nearer to its traditional premium and it said it would assess over time whether it needed to further widen the spread between the two rates.
The central bank's view of the economy has brightened in recent months as job losses eased, consumer spending strengthened and businesses stepped up purchases of equipment and software. The Fed has warned, however, that recovery from the deepest U.S. recession since the 1930s will probably be sluggish and has said it expects to keep the federal funds rate near zero, where it has been since December 2008, for "an extended period."
In its statement on Thursday, it said the economic and policy outlook remained broadly unchanged from late January, when its policy committee reiterated that low-rate pledge.
Some other central banks around the world have begun to tighten policy. Australia led the way last year and its central bank chief signaled on Friday more rate increases in months ahead while China surprised markets twice in the past two months by lifting banks' mandatory reserves.
In the United States, however, the Fed has said record low interest rates are still warranted with the unemployment rate near 10 percent.
"I don't think the Fed dares (to) increase the fed funds or policy rate in the face of unemployment at double-digit type of levels," Bill Gross, the manager of Pimco, the world's biggest bond fund, told Reuters after the Fed announcement.
Other changes announced on Thursday included shortening the typical maximum maturity for primary credit loans to overnight from 28 days, effective March 18, and raising the minimum bid rate for the Fed's Term Auction Facility, another scheme put in place to foster market liquidity.
• DOW +83.66
• Dollar +.34c to 96.02cUS
• Oil +$1.73 to $79.06US per barrel.
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Canada to oppose global bank tax
Paul Vieira, Financial Post
OTTAWA -- Canada will officially oppose international efforts to get the world's major economies to impose a global bank tax, government sources tell the Financial Post.
This could potentially ignite a major divide among Group of 20 leaders at their summit meeting in Toronto this summer, and further thwart efforts to implement uniform financial regulations in the post-recession era.
Senior Canadian officials are in the midst of crafting a public response to be released shortly, say sources with knowledge of the plan. An official response is required, they say, due to recent public musings from Gordon Brown, the British Prime Minister, that the G20 countries were close to a deal on a financial services tax -- the so-called "Tobin" tax.
Canada is co-head of the group this year with South Korea.
"Canada is going to oppose any tax on financial transactions," said one source, adding the tax runs counter to the Conservative government's reputation for lower taxes.
Prime Minister Stephen Harper, as well as Finance Minister Jim Flaherty, want to use their influence as host of the next G20 meeting, in Toronto in June, to kill the proposal. The sources suggested the G20 would not agree to measures or policies unless all leaders sign on.
When he was at the World Economic Forum in Davos last month, Mr. Harper used the global stage to denounce "excessive" and "arbitrary" proposals from countries, such as Britain and France, to regulate the financial-services industry in the aftermath of the global financial crisis.
Among the proposals Mr. Harper was referring to is a levy on financial transactions, designed to make banks pay for the bailouts governments posted in 2008 and 2009 to deal with the financial crisis and to dissuade banks from making risky bets in the future.
Individually, U.S. President Barack Obama has proposed a levy on banks with assets of higher than US$50-billion, while Mr. Brown has taxed bonuses earned by London's top bankers.
Last week, Mr. Brown told the Financial Times he envisaged a G20 deal on a bank tax at the Toronto summit.
Mr. Brown said he believed backing for a global bank tax had gained momentum after Mr. Obama introduced a similar levy.
"People are now prepared to consider the best mechanism by which a levy could be raised," Mr. Brown said in the interview. "I'm interested in the way support is building up for international action."
Mr. Brown's comments have clearly irked Canadian officials. It was only a few weeks ago that Mr. Flaherty and other Group of Seven finance and central officials met in Iqaluit, and appeared to be united in finding a common front of global financial reform. As a show of unity, they agreed to commission a study on the usefulness of a bank levy.
Mr. Brown proposed a global transaction tax at a G20 meeting he hosted in Scotland last November, only to draw stiff opposition -- from, among others, Timothy Geithner, the U.S. Treasury secretary.
Canada's plan to officially quash talk of a bank-tax deal is the latest hiccup in efforts by global leaders to map out a uniform regulatory scheme in the post-crisis world. Leaders from the G20 had agreed to implement uniform rules to prevent companies from seeking out countries with less-stringent regulation. Working groups, such as the Financial Stability Board, are in the midst of developing rules that would apply, such as the levels of capital banks would need to keep on their balance sheets.
But now, despite Mr. Brown's musings, countries appear to be as divided as ever. http://www.financialpost.com/news-sectors/economy/story.html?id=2583353
Fed seeks to calm markets after discount rate rise
Emily Kaiser and Mark Felsenthal, Reuters
WASHINGTON/MEMPHIS, Tennessee -- Federal Reserve officials moved to calm speculation that a surprise rise in its emergency lending rate could bring forward broader policy tightening, saying borrowing costs in the economy would stay low.
Fed Chairman Ben Bernanke flagged the move last week, saying the central bank aimed to widen the spread between its main policy rate that remains pegged near zero and the discount rate at which banks can borrow from the Fed.
However, no one in markets expected it to act so soon and the timing of the move -- well ahead of the March 16 policy meeting -- prompted investors to price in a greater likelihood of a rise in the benchmark fed funds rate late this year.
The dollar jumped and government bonds and bank stocks fell after the Fed raised the discount rate by 25 basis points to 0.75 percent even as it cast it as a response to improved financial market conditions and not a change in monetary policy.
"This is a significant and likely symbolic move that will impact on market sentiment," Robert Rennie, a strategist at Westpac in Sydney said in The Dealing Room, a Reuters Messaging chat room.
"The emergency easing cycle began with discount rate cuts - it was all about easing liquidity to banks. So the move to raise the discount rate means the long journey toward normalization has begun."
Thursday's move is the first increase in any of the Fed's lending rates since the financial crisis blew up in 2007 and the first rate change since December 2008.
"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said in a statement.
OVERBLOWN EXPECTATIONS
While investors initially brushed aside the Fed's assurances that no tightening for the broad economy was on the cards, warnings from a senior Fed official that markets have gone too far in their tightening bets finally did sink in.
St. Louis Federal Reserve Bank President James Bullard said investors belief in high probability of a rise in the Fed's benchmark rate this year was "overblown" and that the discount rate rise should not be seen as a policy signal.
"The discount rate move is part of a normalization process which is akin to our discontinuing many of our liquidity programs," Bullard, who votes on the Fed's interest rate-setting panel this year, told reporters in Memphis. "It does not indicate anything one way or the other about what we might eventually do with the federal funds rate," he added.
The dollar pared gains and treasury futures trimmed losses, after Bullard's comments and reminders from fellow Fed officials that cheap credit was still the order of the day.
"Monetary policy -- as evidenced by the fed funds rate target -- remains accommodative," Dennis Lockhart, Atlanta Fed president, said in a speech. "This stance is necessary to support a recovery that is in an early stage and, in my view, still fragile."
Still, share markets in Asia were on the defensive as the Fed's action, which follows China's moves to curb lending, served as a reminder that the period of cheap cash that fueled last year's stock market rally may be slowly drawing to an end.
RETURN TO NORMAL
Before the financial crisis, the discount rate was typically a full percentage point above the federal funds rate. Thursday's decision begins to move it back nearer to its traditional premium and it said it would assess over time whether it needed to further widen the spread between the two rates.
The central bank's view of the economy has brightened in recent months as job losses eased, consumer spending strengthened and businesses stepped up purchases of equipment and software. The Fed has warned, however, that recovery from the deepest U.S. recession since the 1930s will probably be sluggish and has said it expects to keep the federal funds rate near zero, where it has been since December 2008, for "an extended period."
In its statement on Thursday, it said the economic and policy outlook remained broadly unchanged from late January, when its policy committee reiterated that low-rate pledge.
Some other central banks around the world have begun to tighten policy. Australia led the way last year and its central bank chief signaled on Friday more rate increases in months ahead while China surprised markets twice in the past two months by lifting banks' mandatory reserves.
In the United States, however, the Fed has said record low interest rates are still warranted with the unemployment rate near 10 percent.
"I don't think the Fed dares (to) increase the fed funds or policy rate in the face of unemployment at double-digit type of levels," Bill Gross, the manager of Pimco, the world's biggest bond fund, told Reuters after the Fed announcement.
Other changes announced on Thursday included shortening the typical maximum maturity for primary credit loans to overnight from 28 days, effective March 18, and raising the minimum bid rate for the Fed's Term Auction Facility, another scheme put in place to foster market liquidity.
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